The media has been laser-focused on federal tax reform lately, and rightly so. Overhauling the nation’s tax code will certainly have implications for all Americans, regardless of income. Yet, with all eyes on tax reform, a separate (but equally important) piece of legislation has fallen under the radar. President Trump’s immigration plan, dubbed the RAISE Act, would have a major impact on the economy – particularly as it pertains to commercial real estate.
In August of this year, Republican senators Tom Colton and David Perdue introduced the RAISE (Reforming American Immigration for Strong Employment) Act in the U.S. Senate. It is estimated that the various provisions in the bill would cumulatively slash immigration in the U.S. by more than half.
Specifically, the RAISE Act would eliminate “Diversity Lottery Visas,” a program that gives 50,000 visas to countries that send immigrants to the U.S. in the name of diversity. Second, it would limit the number of refugees that are given permanent residency to 50,000 per year. Third, it would eliminate the ability of immigrants to sponsor visas for extended family members and adult children. Finally, the RAISE Act would restructure the employment-visa system into a points system (similar to those used in Canada, Australia and the UK), a system that gives preference to young, more highly-educated immigrants who already have well-paying job offers.
Observers are quick to note that the RAISE Act would have no direct effect on illegal immigration, so overall immigration may fall less than projected as more families try to enter the U.S. illegally (an impact that Trump pledges to offset with stricter border control).
How the RAISE Act Would Impact Commercial Real Estate
Whether you’re pro-immigration or not, there’s a growing body of evidence that the RAISE Act would disproportionately affect the commercial real estate industry (CRE).
Impact on Construction Activity
The disproportionate impact on CRE is particularly evident when we look at the construction industry. While legal, foreign-born workers make up roughly 17% of the U.S. labor force, they fill 25% of construction positions. And it’s estimated that there are another 1.1 million immigrants without documentation in the construction industry. In short, immigrants (legal and otherwise) play a crucial role in the construction industry. Many of these construction jobs are clustered in cities that have experienced a disproportionate share of development during this market cycle, like New York, San Jose and Los Angeles. Construction activity could grind to a half if this already constrained workforce were to be scaled back.
Labor Shortages Could Delay Multifamily Deliveries
According to Yardi Matrix, multifamily unit deliveries were expected to peak in 2017 – a timeline that has since been delayed to 2018 due to labor shortages. The report, “Multifamily Deliveries Slow as Worker Scarcity Increases Construction Times,” compiles data from more than 2 million apartment units built in more than 100 units over the last decade. Not surprisingly to those of us familiar with the California real estate market, prolonged completion times were highest in Orange County, East Los Angeles and San Jose. Related to the point above, the RAISE Act would make access to skilled construction workers that much more challenging in the years to come, delaying badly-needed housing in the process. Consequently, existing home values and rents could rise given the lack of new supply coming online.
Impact on Property Management
Legal, foreign-born workers also fill a disproportionately large share of buildings/grounds cleaning and maintenance jobs – 31% compared to 17% across all U.S. industries. Property management is a highly labor-intensive industry. A skilled labor shortage could increase the cost of property management services caused by accelerated wage growth or conversely, result in a lower quality of services provided by property management companies spread too thin.
Less Foreign Capital Available for New Development
The RAISE Act would kill EB-5, an important immigrant investor program that supplies capital for new development projects located in underserved and under-employed parts of the country. The EB-5 visa program was first introduced in 1990 with the intent of issuing 10,000 investors green cards in exchange for investing money in high-poverty areas. Individuals who invested at least $500,000 could fast-track their way to the U.S. Though the program has been riddled with scandals over the years, the program is a frequent source of capital for new real estate development projects.
The RAISE Act would require investors to apply for visas using the new points-based system, though the system would give bonus points to those who commit to investing their personal capital in the U.S. The two biggest differences are (1) the RAISE Act raises the threshold from $500,000 to a minimum of $1.35 million; and (2) investors would now be required to deploy their capital into a business – it would eliminate the possibility of passive investment in real estate, which would eliminate an important financing tool used by real estate developers (and a tool that proved critical during the recession as traditional sources of capital died up).
Reduced Demand for Office Space
Skilled-foreign born workers often occupy business, science and management positions – some of the top industries driving office demand. The RAISE Act would scale back the H-1B visa program, the nation’s second largest work visa program, which supplies educated talent to tech and service-related firms. San Francisco and San Jose are two of the nation’s top cities for certified H-1B positions, where an oversized share of Computer Systems Analyst, Software Developer and Computer Programmer positions are filled by foreign-born workers. Without access to foreign-born talent, U.S. based companies may experience slower growth and therefore, could need less office space.
Less Demand for Housing
Similarly, reducing immigration could impact demand for housing. In 2017, nearly half of the nation’s population growth is expected to come from immigration. This will disproportionately affect the nation’s most populous cities, as 61% of foreign-born residents reside in just 10 U.S. cities. Historically, immigrants to the U.S. have grouped together in large cities to maximize economic opportunity and to ease cultural transition. This continues today. San Diego ranks first in the nation for share of foreign-born residents (38.9% of its population), followed by Los Angeles (38.2%), New York (37.2%), Houston (28.5%) and San Diego (26.6%).
A recent Cushman & Wakefield analysis confirms that between 1995 and 2015, population growth in these cities was highly dependent upon international immigration. In many cases, the native-born population in these cities shrunk during that time. Slashing immigration could very well reduce demand for new housing in some of the nation’s priciest residential markets. Rental housing could take the biggest hit. Over the past decade, approximately two-thirds of new renter households were foreign-born and minorities. Trump’s immigration policy would impede that growth moving forward.
What to Expect Moving Forward
The future of the RAISE Act is still in question. When the bill was introduced to the Senate in August, it was vehemently opposed by Democrats, immigrant rights groups and even some Republicans. While reforming immigration policy remains a stated priority of the Trump immigration, it seems to have fallen on the backburner as Congress tries to work through a complicated tax reform bill.
Whether immigration reform rises to prominence again in 2018 is anyone’s guess. In the meantime, real estate investors, developers and property managers would be well-suited to start preparing for potential labor shortages, less foreign-investment in U.S. real estate deals, and the possibility that the pendulum shifts in relation to housing demand. In any event, we’ll continue to monitor this legislation closely. Stay tuned for more still to come!